The Supreme Court of New Jersey recently affirmed a decision that amnesty and late‑filing penalties did not apply to the taxpayers in United Parcel Serv. Gen. Servs. Co. v. Dir., Div. of Taxation, No. 072421 (N.J. Dec. 4, 2014).  In all, approximately $2 million in penalties and related interest were abated.

The primary substantive issue was imputation of interest related to United Parcel Service’s (UPS’s) cash management system, which hinged on whether the intercompany cash transfers were loans or dividends.  After an audit of the taxpayers’ Corporation Business Tax Returns for the years at issue, the New Jersey Division of Taxation assessed additional tax primarily resulting from the imputation of interest on the intercompany cash transfers, amnesty penalties related to the 1996 and 2002 amnesties, late-filing penalties and interest.  Following a trial, the Tax Court held against the taxpayer on the cash management issue, but noted that “[t]he case law discussed . . . could be interpreted to suggest that the cash management system utilized by the UPS Group may not have” resulted in the tax consequences advanced by the Division of Taxation.  The Tax Court found reasonable cause for the abatement of late-filing penalties and held that amnesty penalties did not apply to the taxpayers.  The Appellate Division affirmed the Tax Court’s decision.

With respect to the amnesty penalties related to the 1996 and 2002 tax amnesties, the statute imposed the amnesty penalties when taxpayers failed to pay liabilities “eligible to be satisfied” through the amnesty programs.  The Tax Court and Appellate Division found that the meaning of the phrase “eligible to be satisfied” was unclear.  Therefore, the lower courts looked to the legislative history for the amnesty programs, which included a statement by the New Jersey Treasurer that “the bill’s penalties will not be applied to deficiencies assessed pursuant to a question of law or fact uncovered through routine audits of taxpayers otherwise in compliance with filing and payment requirements of State taxes.”  The New Jersey Supreme Court looked to that same legislative history.  Noting that the taxpayers had timely filed returns and paid the tax shown as due on those returns, and that the Division of Taxation had uncovered issues of fact and law on audit of the tax returns, the court upheld the decision that the amnesty penalties did not apply.

With respect to the late-filing penalties, the taxpayers argued that reasonable cause existed for the abatement of penalties because the taxpayer had taken a good faith filing position with respect to the cash management system, and the imputation of interest on the cash transfers was an issue of first impression in New Jersey.   The New Jersey Supreme Court noted that the case involved genuine issues of fact and law, and there was “no directly pertinent legal authority then in existence” regarding the cash management system.   The court “therefore agree[d] with the Appellate Division and affirm[ed] the Tax Court’s finding that the Division did not exercise properly the discretion that the Legislature afforded to it . . . when it [...]

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